Detroit governor vows to make bankrupt city great again

PUBLISHED : Saturday, 20 July, 2013, 12:27am
UPDATED : Monday, 22 July, 2013, 9:01am

Detroit will be a great city again once the birthplace of the US automotive industry gets a fresh start with a bankruptcy filing, Michigan’s governor said on Friday.

Saddled with more than US$18 billion in debt and a shrunken tax base, the Motor City has been so strapped for cash it can’t even keep the streetlights on.

“Now is the opportunity to stop 60 years of decline,” Governor Rick Snyder said at a press conference a day after approving the biggest municipal bankruptcy in US history.

“We will come out with a stronger, better Detroit and a format to grow this city. The citizens of not just this city but the state deserve it.”

Once a bustling beacon of industrial might, the city is now a poster child for urban decay, its landscape littered with abandoned skyscrapers, factories and homes.

Now is the opportunity to stop 60 years of decline. We will come out with a stronger, better Detroit
Michigan Governor Rick Snyder

Detroit has seen its population shrink by more than half – from 1.8 million in 1950 to 685,000 today – as crime, flight to the suburbs and the hollowing out of the auto industry ate away at its foundations.

The bankruptcy is expected to make it harder for municipalities in Michigan and other US states to borrow money by undermining confidence in what used to be among the most trusted bonds available.

It is being closely monitored by government workers across the country who are fearful that they too may see their retirement benefits slashed.

About nine billion dollars of the city’s debt is owed to the pension funds and retiree health care benefits of the city’s 10,000 workers and 20,000 retirees.

While pension benefits are protected by the state’s constitution, the bankruptcy process could drastically diminish those obligations.

State-appointed emergency manager Kevyn Orr said the city has about two billion dollars to repay US$12 billion in “unsecured” debt, which includes the pension obligations.

“Yes, there are 10,000 employees. Yes, there are 20,000 retirees. But there are 700,000 citizens who don’t deserve 58 minute (police) response times,” Orr told reporters.

Here’s a look at how the city spiraled into financial ruin and why it’s in so much trouble:


For decades, Detroit paid its bills by borrowing money while struggling to provide the most basic of services for its residents. The city, which was about to default on a good chunk of its US$14 billion-plus debt, now will get a second chance in a federal bankruptcy court-led restructuring. Detroit’s budget deficit this year alone is estimated at US$380 million, and Kevin Orr, its state-appointed emergency manager, chose bankruptcy over diverting money from police, fire and other services to make debt payments. The move conserves cash so the city can operate, but it will hurt Detroit’s image for years. It also leaves creditors with pennies on the dollar and places in jeopardy the pension benefits of thousands of city retirees.


It took decades of decay to bring down the once-mighty industrial giant that put the world on wheels. The city grew to 1.8 million people in the 1950s, luring them with plentiful jobs that paid good wages to stamp out automobiles for sale across the globe. But like many American cities, Detroit’s fall began late that decade as developers starting building suburbs. Then came the 1967 riots that accelerated the number of white residents who moved to the cities north of Eight Mile Road, considered the region’s racial dividing line. At the same time, auto companies began opening plants in other cities, and the rise of autos imported from Japan started to cut the size of the US auto industry. Detroit’s property values fell, tax revenue dropped, police couldn’t control a growing murder rate, and many middle-class blacks fled the city for safer suburbs with better schools. By 2009, the auto industry collapsed along with the economy as a whole, eventually pulling the city down with it. Government corruption under former Mayor Kwame Kilpatrick only made things worse. In the 2000 census, Detroit’s population fell under 1 million in as the exodus continued. Today it’s barely above 700,000.


It’s a big factor. The city is littered with abandoned factories built in the postwar boom years, most of which have multiple stories. As the Japanese auto invasion began cutting into Detroit’s sales, General Motors, Chrysler, Ford and hundreds of auto parts companies looked outside the city to build one-story plants that could handle modern assembly lines. With every downturn, more companies abandoned the city, leaving the hulking buildings to squatters. Detroit’s tax base continued to erode. By the time the auto industry melted down in 2009, only a few factories from GM and Chrysler were left. GM is the only one with headquarters in Detroit, though it has huge research and testing centres with thousands of jobs outside the city.


Before Detroit, the largest local government bankruptcy filing was in Jefferson County, Ala., in November 2011. The county cited more than US$4 billion in debt, mostly from corrupt deals involving sewer financing that fell apart when the home mortgage crisis hit in 2008. The county is still trying to clean up the mess. Last month, commissioners sought a compromise that calls for paying creditors a little over half the money they’re due and raising sewer rates. They hope to exit bankruptcy by December. Jefferson County has nearly 700,000 people, which is similar in size to Detroit, and includes Alabama’s capital, Birmingham. The economic crisis also caused bankruptcies of smaller cities. The California cities of Stockton, San Bernardino, and Mammoth Lakes all filed for bankruptcy last year. Stockton and San Bernardino were hit by plummeting home values during the recession, which cut property and sales taxes, while Mammoth Lakes was overwhelmed by a US$43 million breach-of-contract judgment brought against it by a developer.


Maybe. In GM’s 2009 government-funded bankruptcy, the company was split in two, with money-making assets staying at GM and decrepit plants and billions in debt going to a separate company. GM reduced its debt from US$46 billion to US$8 billion and used the bankruptcy to close factories, shed brands and get more concessions from union workers. The new, leaner company has since racked up US$17.2 billion in profits and added jobs in Detroit. For the city, the comeback will be much harder. Its decaying neighbourhoods can’t be sent elsewhere. But creditors whom Detroit owes more than US$14 billion will have to take pennies on the dollar. Thousands of retired city workers could lose at least part of their pension benefits. Concessions could be forced upon dozens of city unions, including pay and benefit cuts. Free of these financial burdens, Detroit will be able to concentrate its limited dollars on services such as basic police and fire protection. Better services could bring more people and lure more business investment. Already the downtown and an area to the north called Midtown are seeing business and residential growth — signs that Detroit has a future.

Agence France-Presse, Associated Press



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